Vision - Alibaba

98 Annual Report 2007
Notes to the Financial Statements
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2.1 Consolidation (Continued)
To comply with laws and regulations of the People’s Republic of China (the “PRC”) that restrict foreign
ownership of companies that operate Internet information services and other restricted businesses, the
Group operates its websites and provides such restricted services in the PRC through PRC domestic
companies whose equity interests are held by certain directors of the Company. The paid-in capital
of these entities was funded by the Group through loans extended to those directors by the Group.
These domestic companies have entered into certain business cooperation and technical service
agreements with the Group, which make it obligatory for the Group to absorb a substantial majority
of the risk of losses from their activities and entitle the Group to receive a substantial majority of their
residual returns. In addition, the Group has entered into certain agreements with those directors,
including loan agreements for them to contribute paid-in capital to the domestic companies, option
agreements for the Group to acquire the equity in the PRC domestic companies subject to compliance
with PRC laws, pledge agreements over the equity interests of these PRC domestic companies held by
those directors, and proxy agreements irrevocably authorizing individuals designated by the Group to
exercise equity owner’s rights over these PRC domestic companies, whichever is applicable. Based on
these contractual agreements, the Group believes that, notwithstanding the lack of equity ownership,
the contractual arrangements described above give the Group control over the PRC domestic
companies in substance. Accordingly, the fi nancial position and operating results of these entities are
included in the Group’s consolidated fi nancial statements.
Inter-company transactions, balances and unrealized gains on transactions between the consolidated
entities or businesses are eliminated. Unrealized losses are also eliminated but considered as an
impairment indicator of the asset transferred. Accounting policies of subsidiaries have been changed
where necessary to ensure consistency with the policies adopted by the Group.
2.2 Segment reporting
A business segment is a group of assets and operations engaged in providing products or services
that are subject to risks and returns that are different from those of other business segments. A
geographical segment is a group of assets and operations engaged in providing products or services
within a particular economic environment that is subject to risks and returns that are different from
those of segments operating in other economic environments.
2.3 Foreign currency translation
(a) Functional and presentation currency
Items included in the fi nancial statements of each of the Group’s entities are measured using
the currency of the primary economic environment in which the entity operates (the “functional
currency”). The consolidated fi nancial statements are presented in Renminbi (“RMB”), which is
the Company’s presentation and functional currency.